public joint stock company aeroflot – russian airlines · 2019. 12. 4. · 30 september 2019...

PUBLIC JOINT STOCK COMPANY AEROFLOT – RUSSIAN AIRLINES

Condensed Consolidated Interim Financial Statements for the 9 months 2019 Condensed Consolidated Interim Statement of Financial Position as at 30 September 2019 Condensed Consolidated Interim Statement of Profit or Loss for the 3 and 9 months ended 30 September 2019 Condensed Consolidated Interim Statement of Comprehensive Income for the 3 and 9 months ended 30 September 2019 Condensed Consolidated Interim Statement of Cash Flows for the 9 months 2019 Condensed Consolidated Interim Statement of Changes in Equity for the 9 months 2019 Notes to the Condensed Consolidated Interim Financial Statements for the 9 months 2019 Statement of management’s responsibilities for the preparation and approval of the Condensed Consolidated Interim Financial Statements for the 9 months 2019 Condensed Consolidated Interim Condensed Consolidated Interim

Contents Statement of Management’s Responsibilities for the Preparation and Approval of the Condensed Consolidated Interim Financial Statements for the 9 months 2019 Report on Review of Condensed Consolidated Interim Financial Statements

Condensed Consolidated Interim Statement of Profit or Loss .......................................................................1 Condensed Consolidated Interim Statement of Comprehensive Income .......................................................2 Condensed Consolidated Interim Statement of Financial Position ................................................................3 Condensed Consolidated Interim Statement of Cash Flows ..........................................................................4 Condensed Consolidated Interim Statement of Changes in Equity ................................................................6

Notes to the Condensed Consolidated Interim Financial Statements

1. Nature of the business ..........................................................................................................................7 2. Basis of preparation .............................................................................................................................9 3. Accounting policies and new accounting pronouncements .................................................................9 4. Traffic revenue ...................................................................................................................................16 5. Other revenue .....................................................................................................................................17 6. Operating costs less staff costs and depreciation and amortisation ...................................................17 7. Staff costs ...........................................................................................................................................17 8 Finance income and costs...................................................................................................................18 9. Income tax ..........................................................................................................................................18 10. Accounts receivable and prepayments ...............................................................................................19 11. Non-current portion of prepayments for aircraft ................................................................................19 12. Property, plant and equipment ...........................................................................................................20 13. Right-of-use assets .............................................................................................................................21 14. Assets classified as held for sale ........................................................................................................22 15. Accounts payable and accrued liabilities ...........................................................................................22 16. Provisions for liabilities .....................................................................................................................22 17. Lease liabilities ..................................................................................................................................23 18. Loans and borrowings ........................................................................................................................23 19. Share capital .......................................................................................................................................24 20. Dividends ...........................................................................................................................................24 21. Operating segments ............................................................................................................................25 22. Fair value of financial instruments .....................................................................................................26 23. Related-party transactions ..................................................................................................................28 24. Capital commitments .........................................................................................................................30 25. Contingencies .....................................................................................................................................30 26. Subsequent events ..............................................................................................................................32

PJSC AEROFLOT Condensed Consolidated Interim Statement of Comprehensive Income for the 3 and 9 months ended 30 September 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

The Condensed Consolidated Interim Statement of Comprehensive Income is to be read in conjunction with the notes to, and forms a part of, the Condensed Consolidated Interim Financial Statements presented on pages 7 to 32

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Three months ended Nine months ended

Note 30 September

2019 30 September

2018* 30 September

2019 30 September

2018* Profit/(loss) for the period 29,089 12,997 20,305 (17,382) Other comprehensive income/(loss) Items that may be reclassified subsequently to profit or loss: Effect from hedging revenue with foreign currency liabilities 17 (10,813) (2,400) 46,735 (7,504)

Deferred tax related to a result from cash-flow hedging instruments 9 2,163 480 (9,347) 1,501 Other comprehensive income/(loss) (8,650) (1,920) 37,388 (6,003)

TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD 20,439 11,077 57,693 (23,385) Total comprehensive income/(loss)

Shareholders of the Company 19,986 11,560 54,716 (22,418) Non-controlling interest 453 (483) 2,977 (967)

TOTAL COMPREHENSIVE INCOME/(LOSS) FOR THE PERIOD 20,439 11,077 57,693 (23,385)

* Revised Condensed Consolidated Interim Financial Statements for the 3 and 9 months 2018 due to adoption of a new IFRS 16 “Leases” (see Note 3)

PJSC AEROFLOT Condensed Consolidated Interim Statement of Financial Position as at 30 September 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

The Condensed Consolidated Interim Statement of Financial Position is to be read in conjunction with the notes to, and forms a part of, the Condensed Consolidated Interim Financial Statements presented on pages 7 to 32

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Note 30 September

2019 31 December

2018* 1 January

2018* ASSETS Current assets Cash and cash equivalents 22 15,536 23,711 45,978 Short-term financial investments 22 14,778 6,437 8,931 Accounts receivable and prepayments 10 99,032 78,223 85,096 Current income tax prepayment 847 5,488 3,580 Aircraft lease security deposits 2,311 532 423 Expendable spare parts and inventories 15,625 14,300 12,468 Assets classified as held for sale 14 3,724 6,483 2,969 Derivative financial instruments 227 ‑ ‑ Current financial assets under lease agreements 3 3,080 1,804 576 Other current assets ‑ 226 422 Total current assets 155,160 137,204 160,443 Non-current assets Right-of-use assets 13 652,730 668,793 536,678 Property, plant and equipment 12 26,926 26,634 23,355 Prepayments for aircraft 11 19,310 21,148 13,089 Deferred tax assets 29,254 39,403 22,114 Goodwill 6,660 6,660 6,660 Long-term financial investments 5,841 5,393 5,883 Intangible assets 2,353 2,250 2,054 Non-current financial assets under lease agreements 3 19,309 19,261 13,509 Aircraft lease security deposits 2,866 4,283 1,602 Investments in associates 646 545 329 Other non-current assets 38,232 36,246 27,782 Total non-current assets 804,127 830,616 653,055 TOTAL ASSETS 959,287 967,820 813,498 LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities 15 72,440 71,426 69,598 Unearned traffic revenue 50,670 49,874 44,006 Deferred revenue related to the frequent flyer programme 4,635 4,086 2,295 Provisions for liabilities 16 24,425 25,865 10,125 Lease liabilities 17 76,094 78,528 59,244 Short-term loans and borrowings and current portion of long-term loans and borrowings 18 88 175 ‑ Liabilities related to assets classified as held for sale 14 2,166 6,254 2,210 Current income tax liabilities 426 19 ‑ Total current liabilities 230,944 236,227 187,478 Non-current liabilities Long-term loans and borrowings 18 3,239 3,311 3,181 Lease liabilities 17 517,353 577,403 434,534 Provisions for liabilities 16 203,080 202,384 155,025 Deferred tax liabilities 561 766 294 Deferred revenue related to the frequent flyer programme 3,722 3,282 3,842 Other non-current liabilities 7,541 6,068 6,291 Total non-current liabilities 735,496 793,214 603,167 TOTAL LIABILITIES 966,440 1,029,441 790,645 Equity Share capital 19 1,359 1,359 1,359 Treasury shares buyback reserve (7,040) (7,040) ‑ Accumulated profit on disposal of treasury shares 7,864 7,864 7,864 Hedge reserve 17 3,531 (33,857) (25,159) Retained (loss)/earnings (17,372) (31,843) 36,740 Equity attributable to shareholders of the Company (11,658) (63,517) 20,804 Non-controlling interest 4,505 1,896 2,049 TOTAL EQUITY (7,153) (61,621) 22,853 TOTAL LIABILITIES AND EQUITY 959,287 967,820 813,498

* Revised Consolidated Financial Statements for 2018 due to adoption of a new IFRS 16 “Leases” (see Note 3)

PJSC AEROFLOT Condensed Consolidated Interim Statement of Cash Flows for the 9 months 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

The Condensed Consolidated Interim Statement of Cash Flows is to be read in conjunction with the notes to, and forms a part of, the Condensed Consolidated Interim Financial Statements presented on pages 7 to 32

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Note 9m 2019 9m 2018* Cash flows from operating activities: Profit/(loss) before income tax 23,625 (19,796) Adjustments for: Depreciation and amortisation 79,415 65,326 Change in expected credit losses and impairment prepayments (76) 1,043 Change in impairment provision for obsolete expendable spare parts and inventory (112) (8) Change in impairment provision for property, plant and equipment 12 (18) 18 (Profit)/loss on disposal of property, plant and equipment and intangible assets (1,433) 500 Profit from disposal of assets classified as held for sale 14 (876) (408) (Gain)/loss from impairment and fair value changes of investments, net (358) 3 Hedging result 17 2,302 4,925 Change in provisions for liabilities 16 (2,196) 154 Interest expense 8 39,031 34,380 Interest income 8 (3,001) (4,173) Foreign exchange (gain)/loss, net 8 (296) 52,510 Dividend income (92) (61) Revaluation/modification under lease contracts 52 774 Profit from change in the fair value of derivative financial instruments 8 1,840 ‑ Other operating (income)/expenses, net (426) (213) Total operating cash flows before working capital changes 137,381 134,974 Increase in accounts receivable and prepayments (7,607) (15,347) Increase in expendable spare parts and inventories (1,203) (1,523) (Decrease)/increase in accounts payable and accrued liabilities (4,506) 3,445 Total operating cash flows after working capital changes 124,065 121,549 Change in restricted cash 25 221 (191) Income tax paid (1,190) (4,392) Income tax refunded 3,636 1,382 Net cash flows from operating activities 126,732 118,348

* Revised Interim Consolidated Financial Statements for the 9 months 2018 due to adoption of a new IFRS 16 “Leases” (see Note 3)

PJSC AEROFLOT Condensed Consolidated Interim Statement of Cash Flows for the 9 months 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

The Condensed Consolidated Interim Statement of Cash Flows is to be read in conjunction with the notes to, and forms a part of, the Condensed Consolidated Interim Financial Statements presented on pages 7 to 32

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Note 9m 2019 9m 2018* Cash flows from investing activities: Deposits return 9,137 14,988 Deposits placement (17,797) (14,065) Proceeds from sale of property, plant and equipment 34 67 Proceeds from sale of assets held for sale 4,892 3,101 Interest received 1,015 2,431 Purchases of property, plant and equipment, right of use asets, intangible assets and capitalized repair expenses (17,661) (25,861) Dividends received 224 105 Prepayments for aircraft 11 (21,321) (8,836) Return of prepayments for aircraft 11 6,392 21,096 Payment for financial assets under aircraft lease contracts (4,307) (3,378) Repayment of financial assets under aircraft lease contracts 1,120 1,440 Repayment of operating lease security deposits (505) (2,246) Placement of borrowings (19) ‑ Net cash flows used in investing activities (38,796) (11,158) Cash flows from financing activities: Receipt of loans and borrowings 18 11,861 350 Repayment of loans and borrowings 18 (11,830) (87) Repayment of the lease liabilities principal 17 (57,522) (50,724) Interest paid except for interest under lease contracts (274) (188) Interest paid under lease contracts (34,736) (30,691) Dividends paid (3,010) (14,262) Purchase of treasury shares 19 ‑ (7,040) Net cash used in financing activities (95,511) (102,642) Effect of exchange rate fluctuations on cash and cash equivalents (600) 1,183 Net (decrease)/increase in cash and cash equivalents (8,175) 5,731

Cash and cash equivalents at the beginning of the period 23,711 45,978 Cash and cash equivalents at the end of the period 15,536 51,709 Non-cash transactions as part of the investing activities: Right of use assets acquired under lease contracts 36,799 108,318

* Revised Interim Consolidated Financial Statements for the 9 months 2018 due to adoption of a new IFRS 16 “Leases” (see Note 3)

PJSC AEROFLOT Condensed Consolidated Interim Statement of Changes in Equity for the 9 months 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

The Condensed Consolidated Interim Statement of Changes in Equity is to be read in conjunction with the notes to, and forms a part of, the Condensed Consolidated Interim Financial Statements presented on pages 7 to 32

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Equity attributable to shareholders of the Company

Note Share

capital

Accumulated profit on disposal of treasury shares

and treasury shares buyback reserve Hedge reserve

Retained earnings/

(loss) Total Non-controlling

interest Total

equity 1 January 2018 1,359 7,864 (25,159) 82,591 66,655 1,746 68,401 The impact of the new standard (IFRS) 16 3 ‑ ‑ ‑ (45,851) (45,851) 303 (45,548) Total restated 1 January 2018* 1,359 7,864 (25,159) 36,740 20,804 2,049 22,853 Loss for the period ‑ ‑ ‑ (16,415) (16,415) (967) (17,382) Loss from hedging net of related deferred tax 17 ‑ ‑ (6,003) ‑ (6,003) ‑ (6,003) Total other comprehensive loss (6,003) ‑ (6,003) Total comprehensive loss (22,418) (967) (23,385) Purchase of treasury shares 19 ‑ (7,040) ‑ ‑ (7,040) ‑ (7,040) Sale of shares to holders of non-controlling interest ‑ ‑ ‑ ‑ ‑ 1,500 1,500 Dividends declared 20 ‑ ‑ ‑ (14,222) (14,222) (284) (14,506) 30 September 2018* 1,359 824 (31,162) 6,103 (22,876) 2,298 (20,578) 1 January 2019 1,359 824 (33,857) 74,958 43,284 2,051 45,335 The impact of the new standard (IFRS) 16 3 ‑ ‑ ‑ (106,801) (106,801) (155) (106,956) Total restated 1 January 2019* 1,359 824 (33,857) (31,843) (63,517) 1,896 (61,621) Profit for the period ‑ ‑ ‑ 17,328 17,328 2,977 20,305 Profit from hedging net of related deferred tax 17 ‑ ‑ 37,388 ‑ 37,388 ‑ 37,388 Total other comprehensive profit 37,388 ‑ 37,388 Total comprehensive profit 54,716 2,977 57,693 Dividends declared 20 ‑ ‑ ‑ (2,857) (2,857) (368) (3,225) 30 September 2019 1,359 824 3,531 (17,372) (11,658) 4,505 (7,153)

* Revised Condensed Consolidated Interim Financial Statements for the 9 months 2018 due to adoption of a new IFRS 16 “Leases” (see Note 3)

PJSC AEROFLOT Notes to the Condensed Consolidated Interim Financial Statements for the 9 months 2019 (All amounts are presented in millions of Russian Roubles, unless otherwise stated)

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1. NATURE OF THE BUSINESS

Aeroflot-Russian Airlines (the “Company” or “Aeroflot”) was formed as an open joint stock company in accordance with a Russian Federation Government decree issued in 1992 (hereinafter, the “1992 Decree”). The 1992 Decree conferred all the rights and obligations of Aeroflot-Soviet Airlines and its structural units upon the Company, including inter-governmental bilateral agreements and agreements signed with foreign airlines and civil aviation enterprises. Under Russian Federation Presidential Decree No. 1009 of 4 August 2004, the Company was included in the official List of Strategic Entities and Strategic Joint Stock Companies.

The Company’s principal activities are the provision of passenger and cargo air transportation services, both domestically and internationally, and other aviation services from Moscow Sheremetyevo Airport. The Company and its subsidiaries (the “Group”) are also involved in airline catering and hotel operations. Associated entities mainly comprise aviation security services and other ancillary services.

The Group's business activities in provision of international and domestic passenger and cargo air transportation services are subject to seasonal fluctuations, the peak of demand is in the second and third quarters of the year.

As at 30 September 2019 and 31 December 2018, the Government of the Russian Federation (the “RF”) represented by the Federal Agency for Management of State Property owned 51.17% of the Company. The Company's headquarters are located in Moscow at 1 Arbat Street, 119019, RF.


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1. NATURE OF THE BUSINESS (СONTINUED)

The table below provides information on the Group’s aircraft fleet as at 30 September 2019 (number of aircraft):

TYPE OF AIRCRAFT OWNERSHIP

PSJC AEROFLOT JSC AK ROSSIYA JSC AK AURORA LLC AK POBEDA GROUP TOTAL DHC 8-Q300 Owned - - 1 - 1 DHC 8-Q402 Owned - - 5 - 5 Total owned aircraft - - 6 - 6 SSJ 100 Lease 49 - - - 49 Airbus A319 Lease - 21 10 - 31 Airbus A320 Lease 78 6 - - 84 Airbus A321 Lease 34 - - - 34 Boeing B737 Lease 47 16 - 30 93 Boeing B747 Lease - 9 - - 9 Boeing B777 Lease 19 10 - - 29 Airbus A330 Lease 22 - - - 22 DHC 8-Q200 Lease - - 2 - 2 DHC 8-Q300 Lease - - 2 - 2 DHC 6-400 Lease - - 3 - 3 Total aircraft under leases 249 62 17 30 358 Total fleet 249 62 23 30 364


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2. BASIS OF PREPARATION

Basis of preparation

The Group’s Condensed Consolidated Interim Financial Statements have been prepared in accordance with IAS 34 “Interim Financial Reporting”. These Condensed Consolidated Interim Financial Statements should be read in conjunction with the Group’s Consolidated Financial Statements for the year ended 31 December 2018, which have been prepared in accordance with IFRS.

Foreign currency translation

The table below presents the US dollar (USD) / Russian Rouble (RUB) and euro (EUR) / RUB exchange rates that were used for translating transaction amounts and monetary assets and liabilities into foreign currencies:

Official exchange rates RUB / USD 1.00 RUB / EUR 1.00 As at 30 September 2019 64.42 70.32 Average rate for 9 months 2019 65.08 73.16 As at 31 December 2018 69.47 79.46 Average rate for 9 months 2018 61.44 73.29 1

3. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS

In preparing the Condensed Consolidated Interim Financial Statements, the Group followed principal accounting policies that are consistent with those disclosed in the Consolidated Financial Statements for the year ended 31 December 2018 and as at this date, with the exception of changes related to adoption of a new IFRS 16 “Leases”, effective since 1 January 2019.

Adoption of IFRS 16 “Leases”

The Group’s accounting policies for leases were modified to comply with IFRS 16 “Leases”, which replaces IAS 17 “Leases” and interpretations relating to leases.

The new standard sets out the principles for the recognition, measurement, presentation and disclosure of leases. All leases result in the lessee obtaining the right to use an asset at the start of the lease and, if lease payments are made over time also obtaining financing. Accordingly, IFRS 16 eliminates the classification of leases as either operating leases or finance leases as is required by IAS 17 and, instead, introduces a single lessee accounting model. According to this model, the Group recognizes in the financial statements: (a) assets and liabilities for all leases with a term of more than 12 months, unless the underlying asset is of low value; and (b) depreciation of lease assets separately from interest on lease liabilities in the Condensed Consolidated Interim Statement of Profit or Loss.

The Group adopted the Standard effective January 1, 2019 using the full retrospective approach which requires each prior reporting period presented to be restated. Right-of-use assets are measured at transition as if the new rules had always been applied.

At transition to IFRS 16, the Group applied the following practical expedients:

− applied the requirements of clauses 22 to 49 of the standard for a short term leases or contracts for which the underlying asset has a low value (up to RUB 300 thousand or $ 5,000) and recognized lease payments for such a lease as an expense of the reporting period on a straight-line basis during the lease term;

− applied single discount rate for a portfolio of leases with reasonably similar characteristics (for leases with a similar remaining lease term for a similar type of underlying assets in similar economic conditions and currency of contract).


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3. ACCOUNTING POLICIES AND NEW ACCOUNTING PRONOUNCEMENTS (СONTINUED)

Adoption of IFRS 16 “Leases” (сontinued)

The main changes in accounting policies since 1 January 2019 at transition to IFRS 16 “Leases”:

Accounting for right-of-use assets and liabilities

Leases are recognized as a right-of-use asset and corresponding liability at the date of which the leased asset is available for use by the Group.

At the commencement date of the lease, the Group includes in the measurement of the lease liability the following lease payments: fixed payments (including in-substance fixed payments) less any lease incentive receivable; variable lease payments that are based on an index or a rate; amounts expected to be payable by the Group under residual value guarantees; the exercise price of a purchase option if the Group is reasonably certain to exercise that option; payments of penalties for terminating the lease, if the lease term reflects the Group exercising an option to terminate the lease.

At the commencement date, assets and liabilities arising from a lease are initially measured on a present value basis using the interest rate implicit in the lease, or if that rate cannot be readily determined, incremental borrowing rate.

Upon initial recognition, in addition to the amount of the initial measurement of the liability, the Group also includes in the cost of right-of-use asset lease payments paid at the commencement date or before such a date less any lease incentives received, initial direct costs, and measurement of the costs that the Group will incur restoration of the underlying asset before its return to the lessor to a condition, specified by the lease term.

After the commencement date of the lease, the Group measures the right-of-use asset using the accounting model at cost less accumulated depreciation and accumulated impairment losses adjusted for the revaluation of the lease liability. The Group measures lease liability at cost by increasing the carrying amount by interest accrued and reducing the carrying amount by the lease payments made taking into account revaluation or modification of lease agreements. The interest on the lease liability is charged to profit or loss over the lease period so as to produce a constant periodic rate of interest on the remaining balance of the liability for each period.

Accounting for сosts of regular capital repairs and maintenance of aircraft

Under aircraft lease agreements the cost of regular capital repairs and maintenance works during the period of operation of the aircraft is capitalized into right-of-use assets and depreciated over the shorter of (i) the scheduled usage period to the next major inspection event or (ii) the remaining life of the asset or (iii) the remaining lease term. In case at the time of the major inspection the component of the previously capitalized expenses were not fully depreciated, the carrying amount of such a component is written off and included into expenses of the reporting period at the time of the next repair. Before transition to IFRS 16, such accounting treatment applied only to financial leases of aircraft.

The provision for repairs and maintenance works on return of aircraft to lessor is regularly remeasured and any changes in the carrying amount of the provision including changes from exchange rate fluctuations are recognized in correspondence with relevant right-of-use asset. This provision is recorded at present value. Right-of-use assets are depreciated on a straight-line basis over the lease term.

Accounting for payments to aircraft maintenance reserve

According to certain aircraft lease agreements in addition to the lease payments the Group makes monthly payments to lessor’s aircraft maintenance reserve for “heavy forms of maintenance” specified in the lease agreement during the lease period.


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After carrying out repairs that fall within the definition of an event that is reimbursed from a previously accumulated maintenance reserve in accordance with the terms of the lease agreement, the Group receives compensation from the lessor in the amount of the actual repair costs, but not more than the accumulate maintenance reserve. At the end of the lease period, any remaining balance in the reserve fund is not reimbursed.

To account for such payments the Group identifies the following types of payments to the lessor:

1) Payments to the maintenance reserve which will be refunded for repair and maintenance performed during the lease period; and

2) Payments to the maintenance reserve the return of which is not expected in cash since the repair and maintenance will be performed by the lessor or other leasee after the lease term.

Upon initial recognition of payments to the maintenance reserve, which will be used for repairs and maintenance performed during the lease term, the Group estimates (i) the amount of payments that are expected to be returned by lessor; (ii) the amount of payments that will not be returned by the lessor. Refundable payments are recognized by the Group as financial assets. The difference between the initial fair value of the financial asset and the amount actually payable to form the recoverable contribution (“loss from occurrence”) is the cost of the lease and is included in the lease liability. A financial asset is recognized when a respective payment to maintenance reserve is made and is initially measured at present value of future refund with application of the discount rate used to measure the lease liability (i.e. the interest rate implied in the lease agreement). The financial asset is increased by interest over the life period of the asset using the effective interest method to the nominal amount to be returned by the lessor to the lessee.

At the commencement date of the lease the Group determines the portion of the loss from occurrence which is the minimum fixed amount during the whole period of payments to the maintenance reserve (lease term). Discounted value of future payments defined as “loss from occurrence” is included in lease liability and the right-of-use asset as of the date the lease is recognized. Any further losses from the occurrence under the contract related to payments to the lessor’s maintenance reserve are expensed as variable lease payments that do not depend on the index or rate.

Payments to maintenance reserve that are not expected to be repaid in cash are accounted for similar to other lease payments under IFRS 16. The Group determines whether these non-refundable payments are fixed or in-substance fixed, and then recognizes liability and right-of-use asset at the commencement date of the lease. If payments are recognized as variable (e.g. depending on flying hours) then such payments (less changes related to the estimates of refundable amount) are recognized within expenses of the reporting period as they arise as lease payments that do not depend on the index or rate.

Accounting for payments made to aircraft repair service providers under payment for flight hours scheme (PBH - Power-by-the-Hour)

Under certain lease agreements for aircraft payments for certain types of repairs of aircraft engines or engine auxiliary power unit are made in proportion to their use directly to the organization (contractor), which subsequently performs these repairs. Such payments are in essence advance payments for the corresponding types of repairs and recorded within “Other non-current assets”. In such case, upon the completion of the repair, the advance payment is set off by the Group taking into account the analysis of whether the repair performed is for the period of the aircraft operation and is subject to capitalization as part of the right-of-use asset; or is related to repairs and maintenance works which are performed on return of the aircraft to the lessor in respect of which a provision for repairs and maintenance works was created; or represents the current repair of the reporting period in which it was made.


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Estimates of the cost of actual repairs are made by the Group’s specialists and if the amount of repairs exceeds the accumulated amount of the advance payment at the reporting date, the Group recognizes accounts payable to the supplier in the Condensed Consolidated Interim Financial Statements and records the subsequent payments to pay off these payables.

Hedge accounting

A significant part of the Group’s aircraft lease agreements are in US dollars. Due to recognition of lease liabilities related to operating lease agreements for aircraft at transition to IFRS 16, the Group updated the approach to assessing the effectiveness of hedge and defined as a hedge object the future highly probable revenue equal to the amount of cash flows under lease agreements on a discounted basis. This change has a perspective effect from 1 January 2019.

IFRS 9 prohibits the retrospective adoption of hedging rules, and therefore the requirements of this standard at transition to IFRS 16 were applied perspectively from January 1, 2019. If the Group reflected the hedge accounting of leasing liabilities in US dollars of the future highly probable revenue in the same currency in respect of the liabilities recognized as a result of applying IFRS 16 from 1 January 2018, then a positive effect on the financial result for 9 months, ended 30 September 2018 would have amounted to RUB 42,3 billion, as a result profit for the period would have amounted to RUB 24,9 billion.

The impact of adoption the IFRS 16 “Leases” on Statement of Financial Position is presented in the table below:

31 December 2018 1 January 2018 Published

financial statements

IFRS 16 impact

Restated financial

statements

Published financial

statements IFRS 16

impact Restated financial

statements

ASSETS Current assets Accounts receivable and prepayments 87,868 (9,645) 78,223 92,749 (7,653) 85,096 Aircraft lease security deposits 525 7 532 423 ‑ 423 Expendable spare parts and inventories 14,659 (359) 14,300 12,779 (311) 12,468 Assets classified as held for sale 6,404 79 6,483 3,125 (156) 2,969 Current financial assets under lease agreements ‑ 1,804 1,804 ‑ 576 576 Non-current assets Right-of-use assets ‑ 668,793 668,793 ‑ 536,678 536,678 Property, plant and equipment 90,964 (64,330) 26,634 97,932 (74,577) 23,355 Deferred tax assets 12,002 27,401 39,403 10,468 11,646 22,114 Non-current financial assets under lease agreements ‑ 19,261 19,261 ‑ 13,509 13,509 Aircraft lease security deposits 4,356 (73) 4,283 1,602 ‑ 1,602 Other non-current assets 27,990 8,256 36,246 19,728 8,054 27,782


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31 December 2018 1 January 2018 Published


IFRS 16 impact

Restated financial

statements

Published financial

statements IFRS 16


statements LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities 69,346 2,080 71,426 68,367 1,231 69,598 Provisions for liabilities 11,393 14,472 25,865 9,433 692 10,125 Lease liabilities 15,219 63,309 78,528 16,015 43,229 59,244 Liabilities related to assets classified as held for sale 6,623 (369) 6,254 2,210 ‑ 2,210 Non-current liabilities Lease liabilities 78,005 499,398 577,403 84,674 349,860 434,534 Provisions for liabilities 23,753 178,631 202,384 16,949 138,076 155,025 Deferred tax liabilities 137 629 766 68 226 294 Equity Retained (loss)/earnings 74,958 (106,801) (31,843) 82,591 (45,851) 36,740 Equity attributable to shareholders of the Company 43,284 (106,801) (63,517) 66,655 (45,851) 20,804 Non-controlling interest 2,051 (155) 1,896 1,746 303 2,049


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The impact of adoption the IFRS 16 Leases on Statement of Profit or Loss is presented in the table below: Three months ended

30 September 2018 Nine months ended 30 September 2018

Published financial

statements IFRS 16


statements

Published financial

statements IFRS 16


statements

Traffic revenue 182,283 ‑ 182,283 422,813 ‑ 422,813 Other revenue 18,240 ‑ 18,240 43,532 ‑ 43,532 Revenue 200,523 ‑ 200,523 466,345 ‑ 466,345 Operating costs, excluding staff costs, depreciation and amortisation (140,403) 29,524 (110,879) (359,748) 77,899 (281,849) Staff costs (19,656) 108 (19,548) (61,315) 469 (60,846) Depreciation and amortisation (3,196) (20,862) (24,058) (9,590) (55,736) (65,326) Other operating income/(expenses), net (143) 3,619 3,476 1,154 7,489 8,643 Operating costs (163,398) 12,389 (151,009) (429,499) 30,121 (399,378) Operating profit 37,125 12,389 49,514 36,846 30,121 66,967 Loss from impairment and fair value changes of investments, net (110) ‑ (110) (3) ‑ (3) Finance income 2,043 (253) 1,790 3,311 1,606 4,917 Finance costs (1,852) (30,510) (32,362) (5,365) (81,566) (86,931) Hedging result (1,941) ‑ (1,941) (4,925) ‑ (4,925) Share of results of associates 136 ‑ 136 179 ‑ 179 Profit/(loss) before income tax 35,401 (18,374) 17,027 30,043 (49,839) (19,796) Income tax (7,683) 3,653 (4,030) (7,553) 9,967 2,414 PROFIT/(LOSS) FOR THE PERIOD 27,718 (14,721) 12,997 22,490 (39,872) (17,382) Attributable to: Shareholders of the Company 27,841 (14,361) 13,480 22,830 (39,245) (16,415) Non-controlling interest (123) (360) (483) (340) (627) (967) PROFIT/(LOSS) FOR THE PERIOD 27,718 (14,721) 12,997 22,490 (39,872) (17,382) Basic and diluted profit/(loss) per share (in Roubles per share) 25.3 12.2 20.6 (14.8) Weighted average number of shares outstanding (millions) 1,101.3 1,101.3 1,107.5 1,107.5


15



The impact of adoption the IFRS 16 Leases on Statement of Cash Flows is presented in the table below:

9 months 2018 Published


IFRS 16 impact

Restated financial

statements

Cash flows from operating activities: Profit/(loss) before income tax 30,043 (49,839) (19,796) Adjustments 24,839 129,931 154,770 Total operating cash flows before working capital changes 54,882 80,092 134,974 Change in working capital (15,600) 2,175 (13,425) Total operating cash flows after working capital changes 39,282 82,267 121,549 Other changes from operation activities (3,201) ‑ (3,201) Net cash flows from operating activities 36,081 82,267 118,348 Net cash flows from/(used in) investing activities 8,049 (19,207) (11,158) Net cash used in financing activities (39,582) (63,060) (102,642) Effect of exchange rate fluctuations on cash and cash equivalents 1,183 ‑ 1,183 Net (decrease)/increase in cash and cash equivalents 5,731 ‑ 5,731 Cash and cash equivalents at the beginning of the period 45,978 ‑ 45,978 Cash and cash equivalents at the beginning of the period 51,709 ‑ 51,709

Adoption of other new standards

Other new amendments and improvements to standards set out below became effective since 1 January 2019 and did not have any impact or did not have a material impact on the Group’s Condensed Consolidated Interim Financial Statements:

− Annual improvements to IFRSs 2015-2017 cycle;

− IFRIC 23 “Uncertainly over Income Tax Treatments”;

− Amendments to IFRS 9 – Prepayment Features with Negative Compensation;

− Amendments to IAS 28 – Long-term Interests in Associates and Joint Ventures;

− Amendments to IAS 19 – Plan Amendments, Curtailment or Settlement.

A number of new standards, amendments to standards and interpretations are not yet effective as at 30 September 2019, and have not been early adopted by the Group:

− Amendments to IFRS 10 and IAS 28 – Sale or Contribution of Assets between an Investor and its Associate or Joint Venture;

− IFRS 17 “Insurance contracts”;

− Amendments to the Conceptual Framework for Financial Reporting;

− Amendments to IAS 1 and IAS 8 – Definition of materiality;

− Amendments to IFRS 3 – Definition of a business;

− Interest rate benchmark reform – Amendments to IFRS 9, IAS 39 and IFRS 7.


16


Adoption of other new standards (сontinued)

Unless otherwise describe above, the new standards, amendments to standards and interpretation are expected to have no impact or to have a non-material impact on the Group’s Condensed Consolidated Interim Financial Statements.

Critical accounting estimates and judgments

In preparing these Condensed Consolidated Interim Financial Statements, the Group’s management makes estimates, judgements and assumptions that affect the implementation of accounting policy and the reported amounts of assets, liabilities, gains and losses. Actual results may deviate from declared estimates. Judgements regarding the accounting policy provisions and valuation methods applied by management when preparing these Condensed Consolidated Interim Financial Statements correspond to those used when preparing Consolidated Financial Statements for the year ended 31 December 2018, and as at this date, except for changes in accounting estimates with respect to the amount of income tax expenses and approach for provisions for regular repairs of aircraft.

The costs of regular capital repairs and maintenance of aircraft

Provision for restoration obligation to bring leased assets in a condition, required by the lease terms is recognised as part of the cost of right-of-use asset in the amount of estimated costs to restore an asset as of the date of initial recognition of the lease and then is depreciated over the lease terms. In determining weather present obligation should be recognised in accordance with IAS 37 «Provisions, contingent liabilities and contingent assets» the Group applies a unified approach to accounting for all costs of repairs and maintenance before return of the aircraft to the lessor, including repairs that depend on the intensity of use of the aircraft, since such repairs are an identifiable event and are planned by the Group in advance. As a rule, the Group has a pre-planned schedule for using the asset and its repairs, which are inevitable. Therefore, at the commencement date of the lease, the Group can reliably estimate the cost of future repairs required upon return of aircraft. Estimates of expected costs are based on the most reliable data on the assessment date. This takes into account the terms of the lease agreements, the age and condition of the aircraft and aircraft engines, the market value of the fixtures, components and assemblies to be replaced, as well as the cost of the work required.

Income tax expense

Income tax expenses are recognised in interim periods on the basis of the best accounting estimate of the weighted average annual income tax rate expected for the full financial year.

4. TRAFFIC REVENUE


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Scheduled passenger flights 176,460 163,439 431,181 379,408 Charter passenger flights 13,863 14,183 30,853 30,566 Cargo flights 4,881 4,661 13,613 12,839 Total traffic revenue 195,204 182,283 475,647 422,813

1


17

5. OTHER REVENUE

Three months ended Nine months ended 30 September

2019 CA

30 September 2018

CA

30 September 2019

30 September 2018

Airline agreements revenue 11,054 11,905 31,050 27,020 Revenue from partners under the frequent flyer programme 3,835 3,821 10,672 9,504 Sales of goods on board 382 447 1,159 1,244 In-flight catering services 525 533 1,197 1,239 Ground handling and maintenance 106 141 335 428 Hotel revenue 110 145 299 407

Other revenue 1,327 1,248 3,624 3,690 Total other revenue 17,339 18,240 48,336 43,532

1

6. OPERATING COSTS LESS STAFF COSTS AND DEPRECIATION AND AMORTISATION

Three months ended Nine months ended 30 September

2019 30 September

2018 30 September

2019 30 September

2018 Aircraft servicing 28,240 24,334 76,674 62,525 Aircraft maintenance 9,955 6,457 23,942 16,558 Passenger services expenses 7,488 7,314 20,219 17,756 Administration and general expenses 4,835 3,737 13,469 11,864 Communication expenses 4,339 3,581 13,483 10,886 Food cost for in-flight catering 4,431 3,242 10,814 8,426 Sales and marketing expenses 3,443 3,029 9,012 7,994 Expenses related to variable lease payments not included in lease liabilities 1,685 1,077 3,574 2,754 Insurance expenses 703 682 1,955 1,744 Short term rent 764 431 2,184 1,478 Cost of goods sold on board 222 126 653 657 Other expenses 2,449 2,789 7,340 7,242 Operating costs less aircraft fuel, staff costs and depreciation and amortisation 68,554 56,799 183,319 149,884 Aircraft fuel 52,861 54,080 145,569 131,965 Total operating costs less staff costs and depreciation and amortisation 121,415 110,879 328,888 281,849

1

7. STAFF COSTS


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Wages and salaries 17,141 15,629 51,819 46,944 Pension costs 3,802 3,134 11,543 10,754 Social security costs 1,122 785 3,497 3,148 Total staff costs 22,065 19,548 66,859 60,846


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7. STAFF COSTS (СONTINUED)

Pension costs include:

• compulsory payments to the RF Pension Fund, • contributions to a non-government pension fund under a defined contribution pension plan under

which the Group makes additional pension contributions as a fixed percentage (20% for 9 months 2019, 20% for 9 months 2018) of the transfers made personally by the employees participating in the programme, and

• an increase in the net present value of the future benefits which the Group expects to pay to its employees upon their retirement under defined benefit pension plans.


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Payments to the RF Pension Fund 3,789 3,123 11,474 10,714 Change in pension plans 13 11 69 40 Total pension costs 3,802 3,134 11,543 10,754

1

8 FINANCE INCOME AND COSTS


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Finance income: CONSAMOU

Interest income 891 1,521 3,001 4,173 Gain on foreign exchange, net 570 ‑ 296 ‑ Other finance income 473 269 1,883 744 Total finance income 1,934 1,790 5,180 4,917


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Finance costs:

Loss on change in fair value of derivative financial instruments not subject to hedge accounting (1,966) ‑ (1,840) ‑ Loss on foreign exchange, net ‑ (19,290) ‑ (52,510) Interest expense (1,157) (1,167) (4,198) (3,214) Interest expense on lease (11,031) (11,905) (34,833) (31,166) Other finance costs (141) ‑ (660) (41) Total finance costs (14,295) (32,362) (41,531) (86,931)

The loss on change in fair value of derivative financial instruments for the 9 months of 2019 relates to fuel option contracts entered into in 2019 for the purpose of hedging a portion of aircraft fuel costs.

9. INCOME TAX

Income tax expense is recognised based on the management’s best estimate of the weighted average annual effective income tax rate for each Group company separately.


19

9. INCOME TAX (СONTINUED)

The expected weighted average annual income tax rate applied to profitable Group companies for the 9 months 2019 equaled to 1 – 30% (9 months 2018: 21 – 46%). The expected weighted average annual income tax rate applied to loss making Group companies for the 9 months 2019 equaled to 0% (9 months 2018: 20 – 25%). Change in expected rates are generally associated with a change in the share of non-deductible expenses.


30 September

2019 30 September

2018 30 September

2019 30 September

2018 Current income tax charge (2,078) (7,107) (2,723) (6,197) Change in deferred income tax (2,924) 3,077 (597) 8,611 Income tax (5,002) (4,030) (3,320) 2,414

10. ACCOUNTS RECEIVABLE AND PREPAYMENTS

30 September 2019

31 December 2018

Trade accounts receivable 43,821 39,911 Other financial receivables 9,939 12,401 Less provision for ECL (11,185) (11,470) Total financial receivables 42,575 40,842 Prepayments to suppliers 10,673 11,810 VAT and other taxes recoverable 19,389 16,759 Prepayments for delivery of aircraft 23,158 5,770 Other receivables 3,772 3,597 Less impairment provision (535) (555) Total accounts receivable and prepayments 99,032 78,223

As at 30 September 2019 and 31 December 2018, the current part of prepayments for aircraft includes prepayments for the acquisition of the following aircraft:

30 September 2019 31 December 2018

Type of aircraft Number of

aircraft, units Expected

delivery date Number of


delivery date Boeing В777 2 2020 2 2019 Airbus A350 9 2020 - -

11. NON-CURRENT PORTION OF PREPAYMENTS FOR AIRCRAFT

As at 30 September 2019 and 31 December 2018, the non-current portions of prepayments for aircraft was RUB 19,310 million and RUB 21,148 million, respectively. Changes in the non-current portion of prepayments are due to the approaching aircraft delivery dates as well as new non-current prepayments.

Prepayments made to purchase aircraft expected to be delivered within 12 months after the reporting date are recorded within accounts receivable and prepayments (Note 10).


20

11. NON-CURRENT PORTION OF PREPAYMENTS FOR AIRCRAFT (СONTINUED)

As at 30 September 2019 and 31 December 2018, the non-current part of prepayments for aircraft include advance payments for the acquisition of the following aircraft:

30 September 2019 31 December 2018

Type of aircraft Number of


delivery date Number of aircraft, units

Expected delivery date

Airbus A350 13 2020-2022 22 2020-2023 Boeing В777 1 2021 3 2020-2021

1

12. PROPERTY, PLANT AND EQUIPMENT

Owned aircraft and

engines Land and buildings

Transport, equipment and other

Construction in progress Total

Cost 1 January 2018 8,140 10,150 19,470 2,760 40,520 Additions 113 33 2,270 2,051 4,467 Disposals (178) (11) (534) (42) (765) Transfers 155 3 609 (767) ‑ 30 September 2018 8,230 10,175 21,815 4,002 44,222 1 January 2019 9,193 10,051 22,546 4,554 46,344 Additions 248 27 868 3,089 4,232 Disposals ‑ (58) (3,263) (324) (3,645) Transfers 177 275 1,183 (1,635) ‑ 30 September 2019 9,618 10,295 21,334 5,684 46,931

Accumulated depreciation 1 January 2018 (1,756) (5,169) (10,165) (75) (17,165) Charge for the year (582) (203) (1,700) ‑ (2,485) Recovery/(accrual) of impairment provision (2) ‑ 4 (20) (18) Disposals 67 7 569 ‑ 643 30 September 2018 (2,273) (5,365) (11,292) (95) (19,025) 1 January 2019 (2,500) (5,354) (11,761) (95) (19,710) Charge for the year (677) (205) (1,873) ‑ (2,755) Recovery/(accrual) of impairment provision (28) ‑ 26 20 18 Disposals ‑ 20 2,422 ‑ 2,442 30 September 2019 (3,205) (5,539) (11,186) (75) (20,005) Carrying amount 1 January 2018 6,384 4,981 9,305 2,685 23,355 31 December 2018 6,693 4,697 10,785 4,459 26,634 30 September 2019 6,413 4,756 10,148 5,609 26,926


21

13. RIGHT-OF-USE ASSETS

Aircraft and

engines Land and buildings

Transport, equipment and other Prepayments Total

Cost 1 January 2018 733,801 12,262 8,419 865 755,347 Additions 142,949 1,968 148 160 145,225 Capitalised expenditures 6,071 ‑ ‑ 775 6,846 Disposals (4,908) ‑ ‑ ‑ (4,908) Transfers to assets classified as held for sale (Note 14) (15,178) ‑ ‑ ‑ (15,178) Transfers 1,093 ‑ ‑ (1,093) ‑ Remeasurement/modification of right-of-use assets 23,922 (338) 2 ‑ 23,586 30 September 2018 887,750 13,892 8,569 707 910,918 1 January 2019 928,234 17,068 8,361 1,061 954,724 Additions 43,459 580 4,190 ‑ 48,229 Capitalised expenditures 6,034 ‑ ‑ 1,890 7,924 Disposals (12,623) (5,792) (37) ‑ (18,452) Transfers 689 ‑ ‑ (689) ‑ Remeasurement/modification of right-of-use assets 3,398 (629) 1,043 ‑ 3,812 30 September 2019 969,191 11,227 13,557 2,262 996,237

Accumulated depreciation 1 January 2018 (208,956) (6,896) (2,817) ‑ (218,669) Charge for the year (59,992) (1,396) (963) ‑ (62,351) Disposals 4,629 ‑ ‑ ‑ 4,629 Transfers to assets classified as held for sale (Note 14) 7,075 ‑ ‑ ‑ 7,075 Modification of right-of-use assets 53 ‑ ‑ ‑ 53 30 September 2018 (257,191) (8,292) (3,780) ‑ (269,263) 1 January 2019 (272,875) (9,080) (3,976) ‑ (285,931) Charge for the year (73,681) (1,440) (1,100) ‑ (76,221) Recovery/(accrual) of impairment provision (100) ‑ ‑ ‑ (100) Disposals 12,523 5,792 37 ‑ 18,352 Modification of right-of-use assets 314 79 ‑ ‑ 393 30 September 2019 (333,819) (4,649) (5,039) ‑ (343,507) Carrying amount 1 January 2018 524,845 5,366 5,602 865 536,678 31 December 2018 655,359 7,988 4,385 1,061 668,793 30 September 2019 635,372 6,578 8,518 2,262 652,730

Capitalised borrowing costs for 9 months 2019 amounted to RUB 745 million (9 months 2018: 775 RUB million). The capitalisation rate of interest expenses and translation differences for the period was 6.5% p.a. (9 months 2018: 5.9% p.a.).


22

14. ASSETS CLASSIFIED AS HELD FOR SALE

As at 30 September 2019, 4 aircraft (31 December 2018: 7 aircraft) Airbus A321 operated under lease agreements were targeted for disposal; therefore, at the end of the reporting period these assets and related liabilities were classified as held for sale.

As at 30 September 2019, the amount of net assets held for sale amounted to RUB 1,558 million (31 December 2018: 229 million).

During 9 months 2019 the Group disposed of 3 Airbus A321 aircraft (during 9 months 2018: 4 aircraft), profit from disposal amounted to RUB 876 million (during 9 months 2018: RUB 408 million).

15. ACCOUNTS PAYABLE AND ACCRUED LIABILITIES

30 September 2019

31 December 2018

Accounts payable 42,838 40,585 Other financial payables 2,609 4,994 Dividends payable 278 64 Total financial payables 45,725 45,643 Staff and social funds related liabilities 16,848 16,387 Advances received (other than unearned traffic revenue) 3,086 3,343 Other current liabilities related to the frequent flyer programme 4,387 4,196 Other taxes payable 1,794 1,323 Other payables 600 534 Total accounts payable and accrued liabilities 72,440 71,426

16. PROVISIONS FOR LIABILITIES

Regular repairs and maintenance

works Other

provisions Total

provisions 1 January 2018 163,422 1,728 165,150 Charge of provision for the period 26,087 164 26,251 Use of provision for the period (6,006) (33) (6,039) Remeasurement of provision for the period 23,457 ‑ 23,457 Release of provision for the period (2) (8) (10) Unwinding of the discount 3,427 ‑ 3,427 Reclassification ‑ (1,666) (1,666) 30 September 2018 210,385 185 210,570 1 January 2019 226,595 1,654 228,249 Charge of provision for the period 7,066 27 7,093 Use of provision for the period (13,425) (8) (13,433) Remeasurement of provison for period 3,902 ‑ 3,902 Release of provision for the period (770) (1,453) (2,223) Unwinding of the discount 3,917 ‑ 3,917 30 September 2019 227,285 220 227,505

30 September 2019

31 December 2018

Current liabilities 24,425 25,865 Non-current liabilities 203,080 202,384 Total provisions 227,505 228,249


23

16. PROVISIONS FOR LIABILITIES (СONTINUED)

Litigations

The Group is a defendant in legal claims of a different nature. Provisions for liabilities represent management’s best estimate of probable losses on existing and potential lawsuits (Note 25).

As at 30 September 2019, the previously accrued provision of RUB 1,666 million for obligations to pay capitalized social payments stipulated by the legislation of the Russian Federation in connection with the start of a bankruptcy proceedings against JSC Donavia was reclassified to accounts payable (31 December 2018: RUB 1,666 million).

Regular repairs and maintenance works

As at 30 September 2019, the Group made a provision of RUB 227,285 million (31 December 2018: RUB 226,595 million) for regular repairs and maintenance works of aircraft used under operating lease terms.

17. LEASE LIABILITIES

The Group leases aircraft and aircraft engines as well as other properties (real estate, vehicles, etc.) from third and related parties under lease agreements. The list of aircraft that the Group has operated under lease agreements as at 30 September 2019 is disclosed in Note 1. According to the terms of the contracts the aircraft are leased for a period of 6 to 16 years with the possibility of extending this period. Leased aircraft and engines with the carrying amount disclosed in Note 13 are effectively pledged for lease liabilities as the rights to the leased asset revert to the lessor in the event of default.

The Group hedges foreign currency risk arising on a portion of the future revenue stream denominated in US dollars with the lease liabilities denominated in the same currency. The Group applies cash flow hedge accounting model to this hedging relationship, in accordance with IFRS 9 “Financial Instruments”.

As at 30 September 2019, lease liabilities and liabilities related to assets held for sale in the amount of RUB 544,715 million denominated in US dollars (31 December 2018: RUB 93,816 million) were designated as a hedging instrument for highly probable revenue forecasted for the period 2019 – 2031 in the same amount. The Group expects that this hedging relationship will be highly effective since the future cash outflows on the lease liabilities match the future cash inflows on the revenue being hedged. As at 30 September 2019, accumulated foreign currency gain of RUB 4,414 million (before deferred income tax) on the lease liabilities (31 December 2018: accumulated foreign currency loss of RUB 42,321 million), representing an effective portion of the hedge, was recognised in the hedge reserve. The loss reclassified from the hedge reserve to profit or loss for 9 months 2019 was RUB 2,302 million (for 9 months 2018: RUB 4,925 million).

18. LOANS AND BORROWINGS

30 September

2019 31 December

2018 Short-term loans and borrowings: Short-term loans in Russian Roubles 88 175 Total short-term loans and borrowings 88 175 Long-term loans and borrowings: Long-term loans in Russian Roubles 2 800 2 844 Long-term loans and borrowings in US dollars 439 467 Total long-term loans and borrowings 3 239 3 311

The main changes in loans and borrowings during reporting period

The Group has withdrawn a credit line with PJSC Sovcombank (fixed interest rate) in the amount of USD 80 million. As at 30 September 2019, withdrawn part of credit line was fully paid.


24

18. LOANS AND BORROWINGS (СONTINUED)

The main changes in loans and borrowings during reporting period (сontinued)

The Group has withdrawn a credit line with PJSC Sviaz-bank (fixed interest rate) in the amount of USD 70 million. As at 30 September 2019, withdrawn part of credit line was fully paid.

The Group has withdrawn a credit line with PJSC Uralsib (fixed interest rate) in the amount of USD 30 million. As at 30 September 2019, withdrawn part of credit line was fully paid.

As at 30 September 2019, the Group did not have assets transferred to secure loans and borrowings.

As at 30 September 2019 and 31 December 2018, the fair value of loans and borrowings was not materially different from their carrying amount.

Undrawn commitments

As at 30 September 2019, the Group was able to attract additional funds in the amount of RUB 96,403 million (31 December 2018: RUB 84,183 million) available under existing credit lines granted to the Group by various credit institutions.

19. SHARE CAPITAL

As at 30 September 2019 and 31 December 2018, share capital was equal to RUB 1,359 million.

Number of ordinary

shares authorised and issued

(shares)

Number of treasury shares

(shares)

Number of ordinary shares outstanding

(shares) 31 December 2018 1,110,616,299 (47,817,796) 1,062,798,503 30 September 2019 1,110,616,299 (47,817,796) 1,062,798,503

On 25 June 2018, the General Meeting of Shareholders of the Company decided to make a material interested party transaction lease of fifty new MS-21-300 aircraft. Owners of voting shares who voted against this decision or did not participate in voting on this issue were entitled to claim the buyback by the Company of all or part of their shares. As at 30 September 2019 and 31 December 2018, the total number of treasury shares purchased by the Company from shareholders was 47,817,796.

These treasury shares carry voting rights in the same proportion as other ordinary shares.

All issued shares are fully paid. In addition to the shares that have been placed the Company is entitled to place 250,000,000 ordinary registered shares (31 December 2018: 250,000,000 shares) with par value of RUB 1 per share (31 December 2018: RUB 1 per share). Each ordinary share gives a right to one vote.

The Company’s shares are listed on the Moscow Exchange (“MICEX”). As at 30 September 2019 and 31 December 2018, weighted average price was RUB 103.4 and RUB 101.08 per share, respectively.

The Company launched a Global Depositary Receipts (GDR) programme in December 2000. Since January 2014, one GDR equals five ordinary shares. As at 30 September 2019 and 31 December 2018, the Group’s GDRs were traded on the Frankfurt Stock Exchange at EUR 7.05 per GDR and EUR 6.56 per GDR, respectively.

20. DIVIDENDS

At the annual shareholders’ meeting held on 25 June 2019 the shareholders approved dividends in respect of 2018 in the amount of RUB 2.6877 per share totalling to RUB 2,857 million for the Company’s total declared and placed shares excluding treasury shares bought back from shareholders. All dividends are declared and paid in Russian Roubles.

At the annual shareholders’ meeting held on 25 June 2018 the shareholders approved dividends in respect of 2017 in the amount of RUB 12.8053 per share totalling to RUB 14,222 million for the Company’s total declared and placed shares. All dividends are declared and paid in Russian Roubles.


25

21. OPERATING SEGMENTS

The Group has a number of operating segments, but none of them, except for “Air Transportation”, meet the quantitative threshold for determining reportable segment. Flight routes information was aggregated in “Air Transportation” segment as passenger flight services on different routes have similar economic characteristics and meet aggregation criteria.

The air transportation operational performance is measured based on internal management reports which are reviewed by the Group’s General Director. Air transportation revenue by flight routes is allocated based on the geographic destinations of flights. Air transportation revenue by flight routes is used to measure performance as the Group believes that such information is the most material in evaluating the results.

Segment information is presented based on financial information prepared in accordance with IFRS.

Group assets are located mainly in Russian Federation.

The realisation between the segments is carried out on market terms and is eliminated upon consolidation.

Nine months 2019 Air

transportation Other

Inter-segment sales

elimination Total Group External sales 520,879 3,104 ‑ 523,983 Inter-segment sales 544 19,781 (20,325) ‑ Total revenue 521,423 22,885 (20,325) 523,983 Operating profit 60,558 1,137 ‑ 61,695 Gain from fair value changes of investments, net 358 Finance income 5,180 Finance costs (41,531) Hedging result (2,302) Share of financial results of associates 225 Profit before income tax 23,625 Income tax (3,320) Profit for the period 20,305

Nine months 2018 Air

transportation Other

Inter-segment sales

elimination Total Group External sales 463,051 3,294 ‑ 466,345 Inter-segment sales 519 16,570 (17,089) ‑ Total revenue 463,570 19,864 (17,089) 466,345 Operating profit 64,947 2,020 ‑ 66,967 Loss from impairment and fair value changes of investments, net (3) Finance income 4,917 Finance costs (86,931) Hedging result (4,925) Share of financial results of associates 179 Loss before income tax (19,796) Income tax 2,414 Loss for the period (17,382)


26

21. OPERATING SEGMENTS (СONTINUED)

Three months ended 30 September 2019

Air transportation Other

Inter-segment sales

elimination Total Group External sales 211,381 1,162 ‑ 212,543 Inter-segment sales 175 7,678 (7,853) ‑ Total revenue 211,556 8,840 (7,853) 212,543 Operating profit 46,307 770 ‑ 47,077 Gain from fair value changes of investments, net 211 Finance income 1,934 Finance costs (14,295) Hedging result (965) Share of financial results of associates 129 Profit before income tax 34,091 Income tax (5,002) Profit for the period 29,089

Three months ended 30 September 2018

Air transportation Other

Inter-segment sales

elimination Total Group External sales 199,254 1,269 ‑ 200,523 Inter-segment sales 184 6,594 (6,778) ‑ Total revenue 199,438 7,863 (6,778) 200,523 Operating profit 48,170 1,344 ‑ 49,514 Loss from impairment and fair value changes of investments, net (110) Finance income 1,790 Finance costs (32,362) Hedging result (1,941) Share of financial results of associates 136 Profit before income tax 17,027 Income tax (4,030) Profit for the period 12,997

1

22. FAIR VALUE OF FINANCIAL INSTRUMENTS

The estimated fair values of financial instruments have been determined by the Group using available market information, where it exists, and appropriate valuation methodologies. However, judgment is required to interpret market data necessary to determine the estimated fair value. Management uses all available market information in estimating the fair value of financial instruments.

Financial assets carried at amortised cost. The fair value of instruments with a floating interest rate is normally equal to their carrying value. The estimated fair value of fixed interest rate instruments is based on estimated future cash flows expected to be received discounted at current interest rates effective on debt capital markets for new instruments with similar credit risk and remaining maturity. Carrying amounts of cash and cash equivalents, financial receivables (Note 10), investments, lease security deposits, financial assets under aircraft lease agreements and other financial assets are approximately equal to their fair value, which belongs to Level 2 in the fair value hierarchy.


27

22. FAIR VALUE OF FINANCIAL INSTRUMENTS (СONTINUED)

Financial assets measured at fair value through profit or loss. Financial assets measured at fair value through profit or loss are mainly represented by investments in JSC MASH that do not have market quotes and derivative financial instruments. The fair value measurement of JSC MASH cost belong to Level 3 in the fair value hierarchy and are determined through a regular estimation of the expected discounted cash flows, where one or more of the significant inputs is not based on observable market data, including the following: (i) the discount rate determined using the CAPM; (ii) the forecast of passenger traffic and the number of take-off and landing operations based on the evaluation of historical data and public information; (iii) the growth rate of tariffs for ground handling and airport services; and (iv) the amount of capital investments estimated based on the forecast information published by JSC MASH.

The fair value measurement of derivative financial instruments belong to Level 3 in the fair value hierarchy and are determined through level 3 market inputs using the Monte Carlo method. The following inputs were used to assess the fair value of the options: (i) spot price for Brent crude oil observable in the information systems at the valuation date; (ii) forecast price for Brent crude oil determined based on the data provided by analysts for the term of the option; (iii) implied volatility; (iv) currency market rate MosPrime.

Liabilities carried at amortised cost. The fair value of financial instruments is measured based on the current market quotes, if any. The estimated fair value of unquoted fixed interest rate instruments with stated maturity was estimated based on expected cash flows discounted at current interest rates for new instruments with similar credit risk and remaining maturity. As at 30 September 2019 and 31 December 2018, the fair values of financial payables (Note 15), loans and borrowings (Note 18) were not materially different from their carrying amounts. The fair values of financial payables, and loans and borrowings are categorised as Levels 2.

During 9 months of 2019 and 9 months 2018 there was no transfer between levels 1, 2 or 3 of the fair value hierarchy.

The classification of financial assets and liabilities as at 30 September 2019 is stated below:

Note

Financial assets

measured at amortised cost

Financial assets measured at fair

value through profit or loss Total

Cash and cash equivalents 15,536 ‑ 15,536 Short-term financial investments 14,778 ‑ 14,778 Financial receivables 10 42,575 ‑ 42,575 Aircraft lease security deposits 5,177 ‑ 5,177 Long-term financial instruments 94 5,747 5,841 Financial assets under lease agreements 3 22,389 ‑ 22,389 Derivative financial instruments ‑ 227 227 Other non-current assets 953 ‑ 953 Total financial assets 101,502 5,974 107,476

Note

Financial liabilities measured

at amortised cost Total Financial payables 15 45,725 45,725 Lease liabilities 17 593,447 593,447 Loans and borrowings 18 3,327 3,327 Other non-current liabilities 1,549 1,549 Total financial liabilities 644,048 644,048


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22. FAIR VALUE OF FINANCIAL INSTRUMENTS (СONTINUED)

The classification of financial assets and liabilities as at 31 December 2018 is stated below:

Note

Financial assets

measured at amortised cost

Financial assets measured at fair

value through profit or loss Total

Cash and cash equivalents 23,711 ‑ 23,711 Short-term financial investments 6,437 ‑ 6,437 Financial receivables 10 40,842 ‑ 40,842 Aircraft lease security deposits 4,815 ‑ 4,815 Long-term financial instruments 83 5,310 5,393 Financial assets under lease agreements 3 21,065 ‑ 21,065 Other current assets 226 ‑ 226 Other non-current assets 418 ‑ 418 Total financial assets 97,597 5,310 102,907

Note

Financial liabilities measured

at amortised cost Total Financial payables 15 45,643 45,643 Lease liabilities 17 655,931 655,931 Loans and borrowings 18 3,486 3,486 Other non-current liabilities 201 201 Total financial liabilities 705,261 705,261

23. RELATED-PARTY TRANSACTIONS

Parties are generally considered to be related if they are under common control or if one party has the ability to control the other party or can exercise significant influence or joint control over the other party in making financial and operational decisions. In considering each possible related party relationship attention is directed to the economic substance of the relationship, not merely the legal form.

As at 30 September 2019 and 31 December 2018, the outstanding balances with related parties and income and expense items with related parties for 9 months 2019 and 9 months 2018 were disclosed below.

Associates

As at 30 September 2019 and 31 December 2018, the outstanding balances with associates and income and expense items with associates for 9 months 2019 and 9 months 2018 were as follows:

30 September 2019

31 December 2018

Assets Accounts receivable 162 ‑ Liabilities Accounts payable and accrued liabilities 199 136

The amounts outstanding to and from associates will be settled mainly in cash.


30 September

2019 30 September

2018 30 September

2019 31 December

2018 Transactions Sales to associates 1 1 3 4 Purchase of goods and services from associates 847 747 2,435 1,996


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23. RELATED-PARTY TRANSACTIONS (СONTINUED)

Associates (сontinued)

Purchases of goods and services from associates consist primarily of aviation security services.

Government-related entities

As at 30 September 2019 and 31 December 2018, the Government of the RF represented by the Federal Agency for Management of State Property owned 51.17% stake in the Company. The Group operates in an economic environment where the entities and credit organizations are directly or indirectly controlled by the Government of the RF through the relevant government authorities, agencies, affiliations and other organizations (government-related entities).

The Group has decided to apply the exemption from disclosure of individually insignificant transactions and balances with the Russian Government and parties that are related to the Company because the Government exercises has control, joint control or significant influence over such parties.

The Group has transactions with government-related entities, including but not limited to:

• banking services;

• investments in JSC MASH;

• lease;

• purchase of aircraft fuel;

• purchase of air navigation and airport services; and

• government subsidies including those provided for compensating of lost income from passenger flights in certain directions under government programmes.

Outstanding balances of cash at settlement, currency and deposit accounts in the government-related banks: 30 September

2019 31 December

2018 Assets Cash 7,784 15,649

The amounts of the Group’s lease liabilities (including liabilities related to assets held for sale) are disclosed in Notes 14, 17. The share of liabilities to the government-related entities is approximately 55% for lease (including liabilities related to assets held for sale) (31 December 2018: 55% respectively).

For 9 months 2019 the share of Group's transactions with government-related entities is about 22% of operating costs, and about 2% of revenue (9 months 2018: about 24% and about 2%, respectively). These expenses primarily include supplies of motor fuels and the cost of air navigation and aircraft maintenance services at airports.

Transactions with the Russian Government also include taxes, levies and customs duties settlements and charges which are disclosed in Notes 7, 9, 10 and 15.

Compensation of key management personnel

The remuneration of key management personnel (the members of the Board of Directors and the Management Committee as well as key managers of flight and ground personnel who have significant power and responsibilities on key control and planning decisions of the Group), including salary and bonuses as well as other compensations, amounted to RUB 1,102 million for 9 months 2019 (9 months 2018: RUB 1,172 million).

These remunerations are mainly represented by short-term payments. Such amounts are stated before personal income tax but exclude mandatory insurance contributions to non-budgetary funds. According to Russian legislation, the Group makes contributions to the Russian State pension fund as part of compulsory social insurance contributions for all its employees, including key management personnel.


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23. RELATED-PARTY TRANSACTIONS (СONTINUED)

Bonus programme based on the results of the Group

In June 2019 a new bonus programme for members of the Company's Board of Directors was approved. The amounts of payments under the program depend on the criteria of Group passenger traffic, share of international transit from total passenger traffic of the Group and transportation profitability. The fair value of the liabilities under the bonus programme as of 30 September 2019, included in accounts payable, was determined based on the expected payment amount for the reporting period from 1 January 2019 till 30 September 2019 and amount of payment deferred till the end of the programme. Previously adopted programme was terminated.

As at 30 September 2019, the outstanding amount of the liability under the new programme was RUB 37 million ( 31 December 2018: RUB 220 million).

24. CAPITAL COMMITMENTS

As at 30 September 2019, the Group had non-cancellable agreements on future acquisition of property, plant and equipment with third parties amounted to RUB 196,319 million (31 December 2018: RUB 255,116 million). These commitments mainly relate to purchase 22 Airbus A350 (31 December 2018: 22 aircraft), 3 Boeing B777 (31 December 2018: 5 aircraft). Group expects to use supplied aircraft under lease agreements, therefore no cash outflow on entered agreements is expected.

25. CONTINGENCIES

Operating Environment of the Group

The economy of the Russian Federation displays certain characteristics of an emerging market. It is particularly sensitive to oil and gas price fluctuations. The legal, tax and regulatory frameworks of the RF continue to develop and are subject to frequent changes and varying interpretations. In early 2019, the Russian economy continued to show signs of recovery after overcoming the economic decline in previous years. Though, ongoing political tension in the region and international sanctions against certain Russian companies and individuals have a negative impact on the Russian economy. The financial markets continue to be volatile. This operating environment has a significant impact on the Group’s operations and financial position. Management is taking necessary measures to ensure sustainability of the Group’s operations. However, the future effects of the current economic situation are difficult to predict and management’s current expectations and estimates could differ from actual results.

The Group continues to monitor the situation and implement a set of measures to minimize the impact of possible risks on the Group's operations and financial position.

Tax contingencies

The taxation system in the RF continues to evolve and is characterized by frequent changes in legislation, official pronouncements and court decisions, which are sometimes fuzzy and contradictory and subject to varying interpretation by different tax authorities. Taxes are subject to audit and investigation by a number of authorities, which have the authority to impose severe fines and penalties charges. A tax year remains open for review by the tax authorities during the three subsequent calendar years; however, under certain circumstances a tax year may remain open longer. Recent events within the RF suggest that the tax authorities are taking a more tough stance in their interpretation and enforcement of tax legislation.

These circumstances may create tax risks in the RF that are substantially more significant than in other countries. The Group’s management believes that it has provided adequately for tax liabilities in these Condensed Consolidated Financial Statements based on its interpretations of applicable Russian tax legislation, official pronouncements and court decisions. However, the interpretations of these provisions by the relevant authorities could differ and the effect on these Condensed Consolidated Interim Financial Statements, if the authorities were successful in enforcing their interpretations, could be significant.


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25. CONTINGENCIES (СONTINUED)

Tax contingencies (сontinued)

In accordance with amendments to the Russian Tax Code made in 2015, excise duties charged on the aviation fuel obtained by the Group’s airlines are subject to deduction using the following special coefficients: 2.08 for 2018, 2.08 for 2019. Also in accordance with the amendments to the Russian Tax Code adopted in 2019, since September 1, 2019, excise duties charged on the aviation fuel obtained by the Group's airlines are subject to deduction using the coefficient 2.08, increased by VAVIA coefficient, determined in accordance with par. 21 of article 200 of the Russian Tax Code.

Since 1 January 2015, the Russian Tax Code has been supplemented with the framework of beneficial ownership to the income paid from the RF (beneficial ownership framework) for the purposes of applying tax benefits under the Double Tax Treaties (DTT). Given the limited practice of the new rules application, it is impossible to reliably assess the potential outcome of any disputes with tax authorities over compliance with the beneficial ownership confirmation requirements, however they may have a significant impact on the Group.

The Russian transfer pricing legislation is to a large extent aligned with the international transfer pricing principles developed by the Organisation for Economic Cooperation and Development (OECD), but it is characterized by a certain specificity. This legislation provides the possibility for tax authorities to make transfer pricing adjustments and impose additional tax liabilities in respect of controlled transactions (transactions with related parties and some types of transactions with unrelated parties), provided that the transaction price is not arm’s length. Management has implemented internal controls to be in compliance with this transfer pricing legislation.

Tax liabilities arising from transactions between Group companies are determined using actual transaction prices. It is possible, with the evolution of the interpretation of the transfer pricing rules, that such transfer prices could be challenged. The impact of any such challenge cannot be reliably estimated; however, it may be significant to the financial position and/or the overall operations of the Group.

Changes in tax legislation or its enforcement in relation to such issues as transfer pricing may lead to an increase in the Group’s effective income tax rate.

In addition to the above matters, as at 30 September 2019 and 31 December 2018 management estimates that the Group has no possible obligations from exposure to other than remote tax risks.

Management will vigorously defend the Group’s positions and interpretations that were applied in calculating taxes recognized in these Condensed Consolidated Interim Financial Statements, if these are challenged by the tax authorities.

Insurance

The Group maintains insurance in accordance with the legislation. In addition, the Group insures risks under various voluntary insurance programs, including management’s liability, Group’s liability and risks of loss or damage of aircraft.

Liquidity management

The Group Treasury provides flexibility of financing through available credit lines. At 30 September 2019, within the credit lines provided by various credit organizations, the Group had the opportunity to raise additional funds in the amount of RUB 96,403 million for repayment of financial liabilities (31 December 2018: RUB 84,183). In addition to improve liquidity, the Group plans to increase the Group's operating efficiency and further increase cash flow from operating activities.

Litigations

During the reporting period the Group was involved (both as a plaintiff and a defendant) in a number of court proceedings arising in the ordinary course of business. Management believes that there are no current court proceedings or other claims outstanding which could have a material effect on the results of operations and financial position of the Group.


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26. SUBSEQUENT EVENTS

In November 2019, the liquidation of a subsidiary JSC Donavia was completed. The Group is currently evaluating the effect of the liquidation on Financial Reporting for 2019.

public joint stock company aeroflot – russian airlines · 2019. 12. 4. · 30 september 2019...

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